How to file IRS Form 8863? How to claim education credits?

The IRS has a couple of tax breaks for students to help with the hefty costs of education in the U.S. There’s the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC). When used right, these credits can ease the financial burden and cut down your tax bill.

To use these credits, you need to fill out Form 8863 and attach it to your tax return. You can’t claim both credits for one student, but you can use a single form to get both credits for different students. For instance, let’s say you’re a parent or guardian dealing with two dependents in school. One qualifies for the AOTC, and the other qualifies for the LLC. In this scenario, you can use the same form to claim both credits.

Plenty of students pursuing higher education can get tax perks to cover expenses like tuition, school fees, and other education-related costs. Form 8863 helps these students find and grab the right education credit tailored to their situation. These credits are based on how much the student has shelled out for qualified education expenses. We’ll delve into those expenses later in the article.

The two most popular credits are the American Opportunity Credit and the Lifetime Learning Credit. A student can only pick one for their tax refund, and each credit has its own set of rules and advantages. If a family has two dependents enrolled in school, they can claim both the American Opportunity Credit and the Lifetime Learning Credit on their tax forms, but not for the same student.

What’s the American Opportunity Tax Credit?

The American Opportunity Tax Credit, known as AOTC, is a tax credit designed to ease the financial burden of qualified education expenses for students in their first four years of higher education. This means it’s specifically aimed at those starting their college journey.

Here’s the good part: AOTC is a refundable credit. That means, even if the credit reduces your tax bill to zero, you might still get some money back as a tax refund.

How Much Is the American Opportunity Credit?

You can receive a maximum annual credit of $2,500 per person. Over four years, this adds up to a potential $10,000 in educational tax credits.

Here’s how it breaks down:

• You get a 100% credit on the first $2,000 of qualified education expenses paid for each eligible student.
• After that, you get a 25% credit on the next $2,000 in qualified education expenses paid.

If the credit manages to wipe out your tax liability completely, the IRS will even refund 40% of any remaining education tax credit, up to a sweet $1,000 per year.

Who’s Eligible for the American Opportunity Tax Credit?

As per IRS Publication 970, the guide on Tax Benefits for Education, you can usually claim the AOTC if you tick off these three boxes:

1. You cover qualified education expenses for higher education.
2. You pay education expenses for someone who fits the bill as an eligible student. This could be you, your spouse, or a dependent you claim on your federal income tax return.

Now, for someone to be an ‘eligible student,’ a few things need to be kept in mind:

• They can’t have finished the first four years of higher education at their qualifying educational institution.
• No one else can have already claimed the AOTC for this student in any four tax years before the current one.
• During at least one academic period in the tax year, they need to have shouldered at least half of their regular course workload. Plus, they should be enrolled in a program that leads to a recognized degree, certificate, or similar education achievement.
• The student shouldn’t have a conviction for a felony drug offense.”

When you’re dealing with IRS Form 8863, here are some steps to keep in mind:

1. Get Your Form 1098: To claim either the AOTC or LLC education credit using Form 8863, you’ll need your Form 1098-T Tuition Statement. Usually, your school provides this, and it shows the amount billed or received for the year.
2. Check the Numbers: Be aware that the amount on your Form 1098-T might not match the figure you put on your Form 8863. Take a close look at the qualified expenses listed on Form 8863, like room and board, to determine the credit amount you can rightfully claim.
3. Follow the Instructions: Go through the Form 8863 instructions step by step, paying attention to specific details, especially on lines 4 and 7. Afterward, attach Form 8863 to your Form 1040 or the equivalent, and remember to complete a separate Part 3 on page 2 for each student.

What is Lifetime Learning Credit?

The Lifetime Learning Credit is another education perk aimed at students or folks whose dependents are hitting the books. “Unlike the AOTC, the Lifetime Learning Credit (LLC) isn’t refundable, but it comes with a perk: there’s no time limit on how many years you can snag it for. The LLC is up for grabs throughout all your years of postsecondary education, and even for courses that help you enhance your job skills. The beauty here is that the LLC is more flexible compared to the AOTC. You don’t have to chase after a degree or any official education certificate.

With the LLC, you can use it to balance out the cost of tuition and mandatory fees for enrollment or attending classes. This covers payments for course-related books, supplies, and equipment too. Just remember, you can claim the LLC only once per tax return—not once for each student.

How Much Can You Get from the Lifetime Learning Credit?

The Lifetime Learning tax credit chips in with 20% of a student’s eligible expenses for higher education, up to a max of $10,000 per year. In plain terms, this credit can shave up to $2,000 off your annual tax bill.

Now, here’s a key difference from the AOTC: there’s no cap on how many years you can snag the Lifetime Learning Credit. But remember, it’s a nonrefundable tax credit, so it can’t take your taxable income below zero.

The Lifetime Learning Credit might not be as complicated as the AOTC, but it comes in handy for certain situations:

• If you’ve already maxed out your four years of AOTC eligibility.
• If you’re not eligible for AOTC due to a felony drug conviction.
• If you’re a student who doesn’t meet the enrollment requirements (like taking at least half-time coursework) needed for AOTC.

Who’s Eligible for the Lifetime Learning Credit?

In general, you can claim the Lifetime Learning credit if you’re covering qualified education expenses for a student who’s either you, your spouse, or a dependent you claim on your tax return.

Who’s Eligible to File Form 8863?

Before diving into Form 8863, there are a few things to sort out. First off, you’ll need your school’s Employer Identification Number (EIN), and you should have received Form 1098-T from your institution. Most nonprofit schools send this form to their students. However, if your college qualifies for the education credits but isn’t required to send this form, they can still let you know that you can file Form 8863. You’ll just need to show proof of enrollment and that you’ve paid your tuition and other education costs.

Now, here’s where it can get a tad tricky. Any student attending an eligible educational institution can potentially claim an education credit. But, who actually gets the credit and the refund can vary depending on who’s handling the taxes.

If you’re a student who files your own taxes, covers your own education costs, or relies on student loans (not tax-exempt grants), you can file for either of these credits. However, if you’re still considered a dependent on someone else’s taxes, like your parents, they can file to get the education credit. If someone else foots the bill for your education expenses, you usually get the credit, unless you’re a dependent.

But, here’s the catch: there are some limits on who can file Form 8863.

• You can’t claim the American Opportunity Credit if you make over $90,000 when filing as single or $180,000 when filing jointly.
• The Lifetime Learning Credit isn’t an option if your income exceeds $69,000 for single filers or $138,000 for joint filers.
• If you or your spouse are non-residents or didn’t file taxes as a resident alien, you can’t file.
• And, the American Opportunity Credit is off the table if you’ve been convicted of a felony related to drug possession or distribution.

How to Complete IRS Form 8863?

Completing IRS Form 8863 might seem like a difficult process, but let’s break it down into three main parts:

Part 1: Refundable American Opportunity Credit:

• Line 1: Add up all amounts from Part 3, Line 30 (for each eligible student).
• Line 2: Enter the appropriate dollar amount based on your filing status.
• Line 3: Put your adjusted gross income (AGI) from IRS Form 1040 or 1040-SR.
• Line 4: Subtract Line 3 from Line 2. If zero or less, no credit.
• Line 5: Enter the specific dollar amount for your filing status.
• Line 6: If Line 4 is greater than Line 5, put 1.000; otherwise, calculate the decimal.
• Line 7: Multiply Line 1 by Line 6, and put the result on Line 8.

Part 2: Nonrefundable Education Credits:

• Line 9: Subtract Line 8 from Line 7, and use this number in the Credit Limit Worksheet.
• Line 10: Add up all amounts from Part 3, Line 31. If zero, skip Lines 11-17 and enter ‘0’ on Line 18.
• Line 11: Enter the smaller of Line 10 or $10,000.
• Line 12: Multiply Line 11 by 20% to get the potential nonrefundable education credits.
• Line 13: Insert the specific dollar amount based on your filing status.
• Line 14: Put your AGI from IRS Form 1040 or 1040-SR.
• Line 15: Subtract Line 14 from Line 13. If zero or less, skip Lines 16-17 and enter ‘0’ on Line 18.
• Line 16: Enter the dollar amount for your filing status.
• Line 17: If Line 15 is greater than Line 16, calculate the decimal.
• Line 18: Multiply Line 12 by Line 17 and use this number in the Credit Limit Worksheet.
• Line 19: Insert the amount from the Credit Limit Worksheet on Schedule 3 (Form 1040), Line 3.

Part 3: Student and Educational Institution Information

• Line 20: Write the student’s name as it appears on your tax return.
• Line 21: Enter the student’s Social Security number or another Taxpayer Identification Number (TIN) if applicable, as shown on your tax return.
• Line 22: If the student attended only one school, fill in the details about that school and answer the questions about Form 1098-T in column (a). If they attended a second school, use column (b) for that information. If there were more than two schools, you’ll need to add an extra page and complete Line 22 for each additional school. If the school has an address outside the U.S., write the foreign address and follow that country’s postal code and province or state name format. If you’re claiming the American Opportunity Credit for this student, provide the school’s Employer Identification Number (EIN) on Line 22(4).
• Line 23: If the student has already claimed the American Opportunity Credit for any four tax years before 2022, you can’t claim it for them in 2022. Check “Yes” and go to Line 31. If they’ve claimed it for three or fewer prior years, check “No.”
• Line 24: Check “Yes” if the student enrolled at least half-time for one academic period that started in 2022 at an eligible school for a program leading to a degree or credential. If you paid qualified education expenses in 2022 for an academic period starting in the first three months of 2023, consider that period as beginning in 2022. If you checked “Yes,” proceed to Line 25. If “No,” the student isn’t eligible for the American Opportunity Credit; skip Lines 25 to 30 and go to Line 31.
• Line 25: Check “Yes” if the student completed the first four years of postsecondary education before 2022. If so, they’re not eligible for the American Opportunity Credit. Skip Lines 26 to 30 and go to Line 31. If “No,” proceed to Line 26.
• Line 26: Check “Yes” if the student was convicted of a federal or state felony for drug possession or distribution before the end of 2022. If “Yes,” they aren’t eligible for the American Opportunity Credit; skip Lines 26 to 30 and go to Line 31.
  • Note: You can’t claim the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year. If you complete Lines 27 to 30 for this student, don’t complete Line 31.

For American Opportunity Credit:

Line 27: Enter the student’s adjusted qualified education expenses (up to $4,000). Use the Adjusted Qualified Education Expenses Worksheet. Also, enter the total of all amounts from Part 3, Line 30, on Part 1, Line 1.

For Lifetime Learning Credit:

Line 31: Enter the student’s adjusted qualified education expenses. Use the Adjusted Qualified Education Expenses Worksheet provided. Enter the total of all amounts from Part 3, Line 31, on Part 2, Line 10.

Here Are Some Tips for Filling IRS Form 8863

• Be very careful when claiming an education credit on Form 8863. If the IRS audits your return and finds errors in your claim or you can’t provide the required documents to prove your eligibility, you might have to repay the education credit along with interest.
• If you’re uncertain about how to handle your taxes as a student, it’s a good idea to reach out to professionals like the folks at Community Tax. They can determine if you qualify for Form 8863 education credits and also check for any other tax benefits you might be eligible for.

Conclusion

Form 8863 can be a helpful tool when doing taxes. Students can take advantage of education credits with a well-thought-out plan. Colleges and other educational institutes can help students gain confidence when filing taxes. One way to do this may be to have an accountant help find these and other ways to increase students’ tax returns and ensure no mistakes are made when filing for educational credits. If you’re still facing issues or have questions about Form 8863, don’t hesitate to reach out to our experts. They can provide guidance and support to ensure you make the most of these valuable tax benefits.

Frequently Asked Questions